Midwest farmers and bankers face a reckoning this fall as low crop prices and a projected bumper harvest will produce financial losses for the second consecutive year.

After nearly a decade of boom times, farmers in the Upper Midwest lost $58 per acre on corn last year and almost $3 per acre on soybeans. Despite that, bankers around the region refinanced farmers' debt and lines of credit on favorable terms.

But with a second year of losses ahead for many farms, patience among lenders is running thin. A credit crunch now looms that would mark a decisive turn in the farm economy.

"One bad year, you can overlook that," said Brent Gloy, an agricultural economist at Purdue University. "When it starts to be multiple years, the stakes get higher."

Demand for corn has not kept up with ballooning supply, as the United States, China, Brazil and Argentina have helped expand global corn acreage by 18 percent over the past 10 years. Prices remain depressed for all farm commodities, and exports are undercut by a strong U.S. dollar.

Corn and soybean prices both tumbled after a mid-July report from the U.S. Department of Agriculture that showed the nation's crops in good condition, reinforcing the expectation of a new glut in the fall.

"There's going to be a time of correction," said Zach Rada, a farm business management instructor at Ridgewater College in Willmar who works with about 60 farm families.

Already, bankers are forcing farmers to put up more collateral, provide financial updates more frequently and open their operations up for a lookover.

"In the past if you said you have 150 milk cows, they probably assumed you were right," Rada said. "Now we're going to see them out there actually counting."

Total farm lending by Minnesota-based banks has plateaued since 2014, after growing by 45 percent over the previous three years, according to the FDIC.

Lending has slowed in part because costs have dropped slightly, but mostly because farmers have grown more cautious about spending as crop prices have fallen.

"They tend to buy less equipment," said Todd Mather, a St. Cloud-based senior credit director for Bremer Bank, one of the largest ag lenders in the state. "They tend to buy less farmland."

Growers have the option of locking in prices long before they start up the combines in the fall, and much depends on the timing of the sale of their harvest. Those who sold in early June, when the price for corn peaked at $4.43 per bushel, could end up having an OK year, Mather said, since that's on the high end of what bankers consider the break-even price for corn.

"If they pulled the trigger at $4.40 corn and where soybeans were, they're going to be sitting pretty good," Mather said.

Those who waited have been disappointed. The price of a bushel of corn has since dropped sharply, to around $3.30 last week.

When farm profit margins are so thin, and a 30-day swing can turn a profit into a loss, bankers are more apt to ask farmers when they're selling their crops.

A sign of the pressure

In Minnesota, one way to measure the tension between farmers and lenders is the activity in the Farmer-Lender Mediation program, a state-run program that was renewed by the Minnesota Legislature this spring.

When a Minnesota farmer defaults on debt, the lender must send him or her a notice explaining their right to mediation before foreclosure starts. A copy of the notice is sent to the University of Minnesota Extension.

"It's sternly worded," said Kent Olson, an economics professor at the U who tracks the program.

In the current fiscal year that began last October, Minnesota lenders have sent 2,493 such notices. That's the highest number through July since 2010 and a 20 percent increase over last year. March, when lenders issued 437 notices, was the busiest month for the program since they started tracking the data in 2007.

Hoping for a drought somewhere else

Farmers' best hope for profitability in 2016 is a severe drought elsewhere. The more severe and widespread the drought, so long as it doesn't hit Minnesota farmers, the better it will be for Minnesota farmers.

That's what happened in 2012, when crops in Illinois and parts of Iowa were devastated by prolonged hot weather. That drought pushed corn prices above $8 per bushel in July 2012. While that price fell a bit by harvest time, Minnesota farmers, who produced huge yields unaffected by drought, reaped big profits.

"In the short run, it was great," Rada said. "We had high prices and some of the best yields ever. So, anywhere but here."

Farmers start off the year hoping for drought somewhere far away, Gloy said, maybe South America or Central Europe. But as the summer goes by and prices stay low, they're ready to accept bad weather closer to home. Maybe a neighboring state.

"The biggest culprit in all of it is acres of production. We have added a lot of acres," Gloy said. "We made our factory bigger, and it's running at full capacity right now. Somewhere the switch needs to be pulled. Really the only way that happens is with weather problems."

Cycles and a good memory

The volatility of farming is no shock to farmers, or their bankers, said Dean Dirkes, vice president of lending in Melrose for Central Minnesota Credit Union, the largest credit union ag lender in the country with about $350 million farm loans.

He and others said many farmers — he deals with a lot of dairies — are working at break-even points or lower. But they planned for this.

"We stand by our borrowers through tough times and great times because it's a cyclical business," Dirkes said. "It's not all roses, but it's like anybody in business, there's ups and downs."

Most farmers and lenders today either lived through the farm crisis of the 1980s or learned from a parent who did. And bankers say they now lend money to farmers based on their cash flow, not the value of their land. Paul Drackley, a vice president for Farmers & Merchants Bank who is based in White Rock, said his customers have been careful to prepare for the downturn and have money saved from the years of plenty to cover the gaps in the years of want.

Still, the harvest this fall will be a challenge.

"I don't expect too many people to make much money at all this year," said Drackley, whose bank carries $250 million in farm loans, roughly half its loan portfolio.

Older farmers without a son or daughter to pass the farm down to will be more likely to sell land or even retire completely. And, according to Rada, a few farmers who haven't prepared well will face foreclosure or bankruptcy.

"There's definitely going to be some," he said.

A few of Rada's clients are talking about getting out of the business, he said. And if 2017 becomes another year of low prices and high yields, the choices become even more difficult for farmers and bankers.

Farmers who are faced with the option of either mortgaging the whole farm to cover expenses or selling out will be tempted to get out while they still can.

"The question we're going to run into, probably at the end of this year and starting next year, is creditworthiness, and whether lenders are going to be ready to go again," Gloy said.

"You're going to start seeing more problems, more situations where the banker may not be willing to extend credit, or the farmer may not be willing to go that much farther into debt."

Adam Belz • 612-673-4405 Twitter: @adambelz